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Moving Operations or Functions to a New Country? Think Long Term

Establishing or expanding operations or back-office functions in other countries can usher in many benefits, but can also carry hidden costs and risks. Bob Chapman, managing partner, global, for Deloitte LLP, who leads efforts with respect to investments in markets such as Brazil, China, India, Japan and Southeast Asia, discusses important, and sometimes overlooked, considerations in building or relocating in other countries, as well as some of the inherent risks. He also talks about the importance of long-term thinking, the potential downside of labor arbitrage, the imperative of cultural sensitivity, and why training and development are critical to attract and retain talent in the new location.

Q: Companies have several options in locating operations or functions: onshoring, nearshoring, offshoring or a hybrid of those. What are some issues to consider when making location decisions?

Bob Chapman: It’s important to understand the factors that are driving the decision to physically locate certain activities in different parts of the world and how long those factors will persist. For example, in India, the rupee recently devalued significantly, which can make locating operations there attractive if the business’s home country’s currency has a higher valuation. By contrast, a couple of years ago, India’s currency appreciated, presenting a significant challenge to companies with extended delivery operations there.

When considering locations for business units, operations or other corporate activities, companies should look out over a 15-year time horizon and consider what events might occur. You can’t gear up, hire a lot of people, put a significant infrastructure in place and expect to get to size and scale without long-term thinking about how you are going to manage it—and in the face of various scenarios.

Nearshoring tends to offer more flexibility in terms of coming and going, and near shore operations are usually smaller in size and scale. They’re meant to take advantage of local conditions, such as the relatively unrestricted travel between countries in the eurozone.

With onshoring, some of the factors that come into play are specific to a particular industry. For example, an operation with high transportation costs is more likely to be brought back onshore at some point versus being left offshore. By contrast, in the professional services sector, where there is more of a focus on moving intellectual property, transportation costs are essentially the price of airline tickets.

Q: Are there issues to be taken into account when expanding in other countries today that perhaps were not as important in the past?

Bob Chapman: Certainly cybersecurity is one of the most critical topics for organizations to consider. That’s really part of a broader group of activities, including privacy, security, and monitoring and planning for resiliency—not only business interruption. The privacy issue should not be underestimated, and it concerns issues such as protecting the names of clients or customers and their activities. Privacy also extends to employees and their communications, as well as loss of information, for example if someone were to gain unauthorized access to a computer or document. There are also strict rules around data privacy in the European Union, as well as in the U.S. and elsewhere. Businesses looking to expand should carefully consider in advance what kind of information would be sent offshore to an operation or extended delivery facility. Similarly, planning and preparation for physical security over offices, equipment, technology, intellectual property and infrastructure should be undertaken early in the process.

Q: From a risk management perspective, what are some issues to consider in determining where to locate outside one’s own country?

Bob Chapman: First, most businesses want a stable business environment, so they might look at political risks: Is the government stable, are the laws respected, and is there some predictability in terms of how things might get decided? Second, there is the regulatory environment: What types of inspections or reporting are required to meet local requirements? The third consideration is the tax environment and understanding local and national tax regulations.

The Foreign Corrupt Practices Act and similar regulations, such as the U.K. Bribery Act 2010, also must be well understood to keep in compliance with the requirements of those rules. Each country has its corruption type statutes and requirements, including legal requirements. That’s one of the relatively new issues that I think is coming into focus, and businesses should be mindful of the reporting requirements and activities that might cause an issue.

Equally important is the potential downside risk of the investment to expand outside the host country: How will you protect yourself if it doesn’t turn out the way you planned? How will you meet your employment obligations and protect the goodwill that you’ve established with customers or clients?

Q: When moving a highly skilled function, such as finance, to a near shore or offshore location, what critical elements should be considered?

Bob Chapman: It’s critical to consider the size and the scale of the operations and their costs. If the move doesn’t produce a meaningful change in the cost structure, it’s likely to be difficult to realize the desired level of benefits. For a finance function, there are hidden costs to build into the decision model, such as labor and training.

It’s also important to provide staff with development opportunities. If they don’t have chances to expand their careers, it’s going to be challenging to minimize turnover, which can be costly.

Another factor is the cost of the external resources that are brought to bear in an emerging market. For example, expats can be very expensive—two to three times the cost of a local resource to bring them overseas—and then they rotate back and you have to bring others in. Unless you have size and scale to absorb those costs, it can become a very large P&L item that could consume the advantage you’re trying to gain by using labor arbitrage.

Q: A company’s relationships with locals can be pivotal. What are some first steps to building those relationships?

Bob Chapman: The very first relationship cultivated should be a local representative who is loyal and trustworthy vis a vis the investment that you’re about to make. An operation cannot be run from afar, so it usually requires someone on the ground. Next, you will need to assemble a group of advisors to assist in understanding key regulations. Then you’ll need to hire employees who can help maintain your compliance obligations, and that’s really where you start to build up a small-scale infrastructure.

For a small operation, these costs can be high with respect to the revenue that is expected to be generated. So a business might work to scale a near shore or offshore site so that it can absorb those costs and spread them over a larger revenue base.

Q: What are common issues around talent and retention when locating an activity offshore?

Bob Chapman: Attracting top talent is one of the biggest challenges any organization in these marketplaces faces. A talent model needs to be established in terms of attraction and retention, and then a course of action set to meet the project’s objectives. For a finance organization, accounting firm or other skilled labor area, turnover is something you want to minimize because the cost of bringing aboard and training new employees is high compared to keeping existing staff.

If turnover is a challenge, it’s necessary to find out why staff is leaving. One of the issues we faced at Deloitte in our overseas operations was the importance of mobility and workplace flexibility to employees. We took a number of measures to address their interest in flexibility and working remotely when needed.

Another issue to consider is what kind of training are you going to provide, and are you providing skills that people will consider valuable for the longer term? At Deloitte we provided English language courses to help people become more proficient. For a lot of people that training meant they could become more marketable and that provided incentive to stay longer, which benefitted our organization as well.

Q: Given your experience in establishing and managing operations in India, what did you learn about how to be effective and break down cultural barriers?

Bob Chapman: I’ve learned that you have to be surrounded by strong talent and resources to be successful. That means putting in place a management team that can operate well in that particular environment—and with you. If you don’t have confidence in that management team, it’s important to change people out readily and make sure that you regain confidence. I also think having the appropriate senior resources is critically important, and typically, many of those senior resources should come from the host country. Yet, it’s also important to empower the local management and staff in order to be effective.

Another critical element is understanding the local culture—whether that’s outside or inside the U.S. We implemented an acculturation program that required people from outside the U.S. to train in the States to prepare them for some of the differences in culture and protocols when they travel to the U.S. For example, it’s important for people visiting from outside the U.S. to know that if they rent a car and hear a police siren, they need to pull over and stop or they might get arrested. We learned from experience that not everyone knows to do this.

We also have had thousands of U.S.-based employees spend time—some for as long as two to three years—in Deloitte’s U.S India operations so that the educational process goes both ways. By doing so, we’ve been able to build not only a business but strong cultural ties that are essential to doing business.

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